The CMA is calling on the government to introduce a new pro-competition regulatory regime to tackle Google and Facebook’s market power.
Lynn Johannson, Advisor, Sustainability and ESG
January 4th, 2024
Lynn Johannson, President of E2 Management Corporation and Catalyst for THE Collaboration
In a care[...]
New regime needed to take on tech giants
Competition Markets Authority | Release | Jul 1, 2020
The CMA is calling on the government to introduce a new pro-competition regulatory regime to tackle Google and Facebook’s market power.
The dynamic nature of digital advertising markets and the types of concerns identified by the Competition and Markets Authority (CMA) in its market study are such that existing laws are not suitable for effective regulation. It is therefore recommending a new pro-competition regulatory regime to govern the behaviour of major platforms funded by digital advertising, like Google and Facebook.
This recommendation to government is the result of a year-long examination of the markets. The CMA used its statutory information gathering powers to lift the lid on how advertising revenue drives the business model of major platforms.
The CMA’s concerns
UK expenditure on digital advertising was around £14bn in 2019, equivalent to about £500 per household. About 80% of this is earned by just 2 companies: Google and Facebook. Google enjoys a more than 90% share of the £7.3 billion search advertising market in the UK, while Facebook has a share of over 50% of the £5.5 billion display advertising market. Google’s revenue per search has more than doubled since 2011, while Facebook’s average revenue per user has increased from less than £5 in 2011 to over £50 in 2019.
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The services provided by Facebook and Google are highly valued by consumers and help many small businesses to reach new customers. While both originally grew by offering better services than the main platforms in the market at the time, the CMA is concerned that they have developed such unassailable market positions that rivals can no longer compete on equal terms:
- Their large user base is a source of market power – it means that Facebook is a “must-have” network for users to remain in contact with each other, and enables Google to train its search algorithms in ways that other search engines cannot.
- Each has unmatchable access to user data, allowing them to target advertisements to individual consumers and tailor the services they provide.
- Both use default settings to nudge people into using their services and giving up their data – for example Google paid around £1.2bn in 2019 to be the default search provider on mobile devices and browsers in the UK, while Facebook requires people to accept personalised advertising as a condition for using their service.
- Their presence across many different markets, partially acquired through many acquisitions over the years, also makes it harder for rivals to compete.
Each of these factors individually presents a potential barrier to new competition, but together they work to reinforce each other and are extremely difficult to overcome.
These issues matter to consumers. Weak competition in search and social media leads to reduced innovation and choice, as well as to consumers giving up more data than they would like. Further, if the £14bn spend in the UK last year on digital advertising is higher than it would be in a more competitive market, this will be felt in the prices for hotels, flights, consumer electronics, books, insurance and many other products that make heavy use of digital advertising. The CMA found that Google’s prices are around 30% to 40% higher than Bing when comparing like-for-like search terms on desktop and mobile.
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Google and Facebook’s market positions also have a profound impact on newspapers and other publishers. The CMA has found that newspapers are reliant on Google and Facebook for almost 40% of all visits to their sites. This dependency potentially squeezes their share of digital advertising revenues, undermining their ability to produce valuable content.
The need for a new regime
The scale and nature of these issues mean that a new pro-competition regulatory regime is needed so that users can continue to benefit from innovative new services; rival businesses can compete on a level playing field and publishers do not find their revenues unduly squeezed. The CMA’s proposals are consistent with those made by Professor Jason Furman in his report for the government.
The CMA has proposed that within the new regime a ‘Digital Markets Unit’ should have the ability to:
- enforce a code of conduct to ensure that platforms with a position of market power, like Google and Facebook, do not engage in exploitative or exclusionary practices, or practices likely to reduce trust and transparency, and to impose fines if necessary.
- order Google to open up its click and query data to rival search engines to allow them to improve their algorithms so they can properly compete. This would be designed in a way that does not involve the transfer of personal data to avoid privacy concerns.
- order Facebook to increase its interoperability with competing social media platforms. Platforms would need to secure consumer consent for the use of any of their data.
- restrict Google’s ability to secure its place as the default search engine on mobile devices and browsers in order to introduce more choice for users.
- order Facebook to give consumers a choice over whether to receive personalised advertising.
- introduce a “fairness-by-design” duty on the platforms to ensure that they are making it as easy as possible for users to make meaningful choices.
- order the separation of platforms where necessary to ensure healthy competition.
Whilst this recommendation is UK-focused, many of the problems that the CMA has identified are international in nature. It will therefore continue to take a leading role globally in relation to these issues as part of the CMA’s wider digital strategy.
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CMA Chief Executive Andrea Coscelli said:
Through our examination of this market, we have discovered how major online platforms like Google and Facebook operate and how they use digital advertising to fuel their business models. What we have found is concerning – if the market power of these firms goes unchecked, people and businesses will lose out. People will carry on handing over more of their personal data than necessary, a lack of competition could mean higher prices for goods and services bought online and we could all miss out on the benefits of the next innovative digital platform.
Our clear recommendation to government is that a new pro-competitive regulatory regime be established to address the concerns we have identified and regulate a sector which is central to all our lives.
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